Correlation Between Oil and Credit Spreads Is Flirting With Positive Again

June 1, 2017

Simon Ballard, Bloomberg Markets

"Historically, the price of oil has been viewed as a proxy for economic growth/corporate credit fundamentals; rising global growth has the broad impact of pulling the oil price higher and vice-versa.

As such, for Europe and the U.S., given their net oil exporting status, there has been a negative correlation between the oil price and corporate bond spreads over recent years. Rising oil prices have reflected improving global growth prospects, which in turn have buoyed risk appetite and fueled credit spread tightening.

But the relationship between the oil price and corporate-credit spreads has been steadily weakening over recent quarters as loose monetary policy keeps risk-asset spreads anchored, but energy market price performance has been constrained by weakening global growth assumptions. The question now is whether the correlation will continue to fade or whether one of the two data series will fall back into line."